Poe Company is considering the purchase of new equipment costing $80,000. The projected annual cash inflows are $30,200, to be received at the end of each year. The machine has a useful life of 4 years and no salvage value. Poe requires a 10% return on its investments. The present value of an annuity of $1 and present value of an annuity for different periods is presented below. Compute the net present value of the machine. $\begin{array} { c c c }
\text { Periods } & \begin{array} { r }
\text { Present Value } \
\text { of } \$ 1 \text { at } 10 \%
\end{array} & \begin{array} { c }
\text { Present Value of an } \
\text { Annuity of } \$ 1 \text { at } 10 \%
\end{array} \
1 & 0.9091 & 0.9091 \
2 & 0.8264 & 1.7355 \
3 & 0.7514 & 2.4869 \
4 & 0.6830 & 3.1699
\end{array}$

Question

Poe Company is considering the purchase of new equipment costing $80,000. The projected annual cash inflows are $30,200, to be received at the end of each year. The machine has a useful life of 4 years and no salvage value. Poe requires a 10% return on its investments. The present value of an annuity of $1 and present value of an annuity for different periods is presented below. Compute the net present value of the machine. $\begin{array} { c c c } 
\text { Periods } & \begin{array} { r } 
\text { Present Value } \
\text { of } \$ 1 \text { at } 10 \%
\end{array} & \begin{array} { c } 
\text { Present Value of an } \
\text { Annuity of } \$ 1 \text { at } 10 \%
\end{array} \
1 & 0.9091 & 0.9091 \
2 & 0.8264 & 1.7355 \
3 & 0.7514 & 2.4869 \
4 & 0.6830 & 3.1699
\end{array}$

Quizplus · Accepted Answer

- First, we need to calculate the present value of the cash inflows. We can use the present value of an annuity formula:
PV of annuity = Cash inflow x Present value of an annuity factor
PV of annuity = $30,200 x 2.4869 (for 4 years)
PV of annuity = $75,292.18
- Next, we need to calculate the present value of the initial cost. Since it is a one-time cost, we can use the present value of $1 formula:
PV of initial cost = $80,000 x 0.6830 (for 4 years)
PV of initial cost = $54,640
- Finally, we can calculate the net present value:
Net present value = PV of cash inflows - PV of initial cost
Net present value = $75,292.18 - $54,640
Net present value = $20,652.18
Since the net present value is positive, the investment is expected to be profitable and therefore the best choice is C.

Poe Company Is Considering the Purchase of New Equipment Costing